Below is a link to Hillary Stiff's slides from HostingCon 2017 on current valuations in the hosting and cloud markets. Please feel free to send over any questions.

Cheval Capital, Inc.

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell any stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale or purchase of a business or making other financial decisions.

We want to thank our clients and colleagues for a record breaking 2016. M&A activity in cloud, hosting and related business segments was at high levels during 2016 and we were fortunate to complete 24 M&A and 35 IPv4 block transactions. The M&A transactions included a broad mix of sizes and types of hosting businesses and we have now completed over 370 internet services and related transactions since we first got started in the space in the mid-1990s.

As we have done for the last few years at this time, we’d like to take a moment to highlight a few of the industry trends that caught our eye during 2016:

Industry growth in dollar terms continues to accelerate - *: The Hosting and Cloud business had another solid year in 2016. While the industry’s growth rate declined to an estimated 18.8% rate in 2016 from 20.2% in 2015, the industry’s growth in total dollars accelerated from an estimated $12.1B increase in 2015 to an estimated $13.5B increase in 2016. We believe the continued increases in dollar growth to be a more significant predictor of industry health than percentage growth at this time, particularly in the current stable/declining price environment. These increases highlight the continued expansion of demand for cloud, hosting and related services. 451 Group’s projections indicate growth in dollar terms is likely to continue to accelerate over the next few years.

As in previous years, growth across the industry continues to be uneven. This year we’ve worked with hosters growing at 30+% per year and hosters that are shrinking. We expect this unevenness to continue.

(* - 451 Research, Market Monitor 2016.)

Divergence of brains & brawn: We’ve seen increasing numbers of service providers offering service on others’ infrastructure. While not uncommon in the past, we’re now seeing it on a larger scale and among providers of higher end and more specialized services. Our expectation is that as the hyper-scalers continue to reduce prices and expand service, we will see more of these infrastructure-lite providers. We believe this separation is due in part to a declining rate of return on commodity infrastructure and in part from new opportunities the hyperscalers are creating (e.g. support, onboarding, management.)

We also believe that for the smaller providers, selling brains is likely to generate a higher risk adjusted return than commodity computing infrastructure. A key problem however, is that valuation and sale of businesses that sell hours of service like a consulting firm can be more difficult. Companies following this path need to ensure they automate and productize their service.

AWS Lightsail: Amazon Web Services (“AWS”) released a new VPS hosting product in late 2016. While the Lightsail product is not revolutionary or particularly aggressively priced, it does signal AWS’s desire to go after the unmanaged VPS market more seriously. If AWS remains true to form, we can expect price cuts, better hardware and an expanded product/service portfolio down the road. Given their size advantages, they are likely to be a formidable competitor to existing SMB hosters.

We recently gave a presentation on M&A at a customer conference for a large Hosting Industry vendor. The slides turned out to be pretty complete so we're reposting!

Please feel free to contact us if you have any questions or comments.

Cheval Capital

Disclaimer: This post is for general information purposes and is not meant to be taken as financial advice, a recommendation to buy or sell the stocks mentioned above, a comprehensive discussion of valuation or how to do the calculations discussed. Please be sure to consult your financial advisors when valuing your company, considering the sale of your business or making other financial decisions.

We will be in New Orleans at #HostingCon2016 this month (July 24-27th.) HostingCon is a conference and trade show for the web hosting and cloud community and we're looking forward to seeing everyone once again this year! Some of our events include;

Sunday at 5pm is the HostingCon Game Show. Aaron Phillips of #cPanel is hosting a trivia contest and Family Feud game. The winning team gets dinner at Shaya, the James Beard Award winning best restaurant for 2016!

On Monday at 10am, join us for the panel, "How Service Providers Can Raise Money for Business Growth". The focus will be on financing tools available to small to mid-sized companies including options such as SBA financing and leasing.

Tuesday at 9am will be an Acquisition panel with some of the big buyers in the industry focusing on how they evaluate companies and things sellers can do to help their valuations.

Please let us know if you'll be coming as we'd be happy to get together.

This turned out to be a great panel with Hillary Stiff (Managing Director of Cheval Capital), Ditlev Bredahl (CEO of OnApp), Joe Bardenheier (SVP of Endurance), Mike Jones (CFO of Softlayer), and Sumeet Sabharwal (SVP of Navisite.) There were no slides but David Snead posted a description of the panel with some of its key thoughts on his WHIR blog. If you aren't aware of David Snead, he is a well regarded, Washington D.C. attorney that works exclusively with companies that provide the infrastructure supporting the internet and those who create and distribute products and services electronically. His website is here.

The WHIR recently held a webinar on Selling Your Hosting Company. The panel included Eric Furlow of Furlow Consulting, Attorney David Snead, Frank Stiff of Cheval and was moderated by Liam Eagle, Editor of the Web Host Industry Review

Hillary Stiff of Cheval Capital spoke at HostingCon 2008 with Joe Bardenheier of the Endurance International Group in a talk titled, "Valuing & Structuring Hosting Company Acquisitions." The slides can be dowloaded or viewed below.

Hillary Stiff spoke at HostingCon 2007 on "Metrics That Mean Money And How To Track Them," with Isabel Wang, David Snead, Joe Bardenheier of The Endurance International Group, Jeffrey Stibel of Web.Com, Adam Dillaplain of CaroNet and Brian Shephard of Canada Web Hosting. The purpose of Hillary's presentation was to help hosters understand some of the reasons why getting good measurement systems in place was important when it came to raising money or selling their businesses.

Hillary Stiff spoke at HostingCon 2007 with Joe Bardenheier, Vice President of Corporate Development at The Endurance International Group. Their topic was "Mergers & Acquisitions in the Web Hosting Industry" and Hillary spoke on the current valuation trends in the industry and described some of the key determinants to the value of a hosting company.

The information above and its links are intended as general information only and should not be construed as advice of any kind nor an offer, solicitation, or recommendation with respect to any transaction. Where advice is necessary or appropriate consult with a qualified advisor. Cheval assumes no responsibility for the content of this page or its links nor duty to update them for changes in conditions or circumstances.